Perhaps the most common tool of investment regulation is the granting by governments of industrial licences for the creation of new industrial capacity according to their projections of future demand.
The success of less rigid means of regulating investment has prompted some countries to streamline their licensing systems. Others have tried to dismantle their systems gradually. One approach is to relax restrictions and raise the lower limit for investments that require licenses.
Studies of Brazil, Egypt, India, Indonesia, Mexico, Pakistan and Spain indicate that industrial licensing involves unexpected costs but delivers few of the expected benefits. The systems are often too complex and implemented [ad hoc]. For example, in Spain, government agencies developed economic criteria for the granting of licences, but were unable to implement them on a systematic basis. This created uncertainty among investors. In some countries the licensing process can take six months or longer, and even then the applicant may fail. Investment is discouraged, and research suffers because there is little assurance that firms will receive licences to turn plans for new products into reality. Licensing usually favours large firms over small, although very small firms often lie outside the licensing system altogether. Large firms tend to be better informed and can allocate more resources to deal with the licensing system. Where multiple applications are permitted, large firms have been known to preempt the entire capacity available through licensing. In some countries the authorities have attempted to promote competition by licensing several small firms. But in industries where economies of scale are important, investment in firms of less than optimal size has merely fostered inefficiency. Another drawback is that countries need to commit manpower to administer their licensing system. This carries a high price, particularly in African economies where skilled manpower is scarce. Furthermore, industrial licensing can engender corruption, especially when the interpretation of rules is left to the discretion of a few officials.
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